It may be a new year, but the same old housing propaganda has continued.
The latest being an article about someone who has increased their wealth in just 6 years, all by buying a home!
The link to the article is here. Have a read before moving forward.
Why returns from housing are incorrectly calculated
Let’s debunk a couple of things from this article:
1/. Amount of wealth increase from house sale
The house was brought for $330,000 and is now worth $650,000. Seems pretty simple right? Sounds like a $300,000 increase.
The problem is it is not $300,000 in increased wealth because you have to pay costs to own a house. Conveniently the editors and writers at Stuff have either left that part out or simply don’t understand.
We will have to make a few assumptions, but let’s try and breakdown some six-year costs of home ownership.
Assumptions:
$264,000 mortgage (20% deposit)
4.5% average mortgage interest rate
30-year mortgage
2% of purchase price ($6,600 per year) in annual maintenance costs
5% investment returns (used to calculate opportunity cost of not using deposit cash elsewhere)
Rates - $2,000 per year
House insurance - $1,500 per year
6-year costs:
Mortgage interest $67,636
Maintenance $39,600
Rates $12,000
Insurance $9,000
House sales cost $30,000
House purchase costs $5,000
Opportunity cost of $71,000 purchase costs $24,150
TOTAL 6 YEAR HOME OWNERSHIP COSTS $187,386
2/. Owning is cheaper than renting
They mentioned how much money they are saving by not paying rent. Initially they were paying $400 a week in rent, and now they say it would cost $600 a week to rent. Let’s just assume a 6-year average of $500 per week in rent, split down the middle.
Annual rent = $26,000 ($500 x 52 weeks)
Annual home ownership costs = $31,231 ($187,386/6)
So, it turns out that renting over that 6 years is actually cheaper than owning. Over $5,000 a year cheaper.
For some reason the homeowners and article editor only wanted to include the mortgage costs as a comparison. Why leave out all the other costs of home ownership that renters don’t incur?
So, let’s add in the renter’s surplus cash of $5,231 per year ($31,231 - $26,000) back into the home ownership costs calculation:
$5,231 x 6 years = $31,386.
6-year home ownership costs are now $218,772, not $187,386.
With a house price increase of $320K and home ownership costs of $219K, this means a 6-year increase in wealth of approximately $101K
This is a far cry from the $300K wealth increase detailed in the article.
3/. Housing costs/information not disclosed
The house price in the article has increased by 97%, whereas the rest of Hamilton has increased by just 63%. Something doesn’t add up here.
I am guessing that the homeowners have done some works to the house that are not mentioned in the article, in order to bring their house value up. This means even more home ownership costs, bringing the wealth increase number down to well below $100K.
Final thoughts
Don’t get me wrong, this couple have done something great for themselves, and entered the market at an incredibly lucky time. And home ownership over the LONG TERM is generally better financially than renting.
However, they are claiming their house has increased in price by 97%, when the median house price in Hamilton (the same area) has only increased by 63% during the same period. So, either they got extremely lucky with their purchase price, which I doubt since the median price in 2013 was $310,000, or they have done some work to the house which they haven’t disclosed! Or maybe their house price expectations of what their house would sell for is too high. All these scenarios would decrease the stated wealth increase even further.
At the end of the day it is still a pretty good result. But my issue is with the result being way overstated by at least 3 times. Their wealth increase over 6 years was a maximum of $100,000, not $300,000.
This is extremely irresponsible reporting and is basically lies. People who don’t know any better, such as the couple in the article, will read this and think it sounds amazing! Short term home ownership is awesome they may say!
The homeowners in the article are paying more owning the house than they were renting and they don’t even know it! Thankfully the house price increase has saved their ignorance.
Someone reading this may go out and buy an overpriced house, totally disregarding all their costs of home ownership. It’s basically a housing pyramid scheme where some get very lucky, such as those that have bought in the last 15-20 years, but others will not be so lucky once the music stops.
The couple have supposedly experienced 16% annual return on the house price (remember, this is not in the pocket, money) and this will not continue at that same rate.
If house prices increased at the Hamilton long term average of 7%, then their wealth would have actually decreased compared to the renter. Will you be lucky?
Home ownership is a good thing for most, but please, let’s be honest about things. Why the need to exaggerate?
If the housing industry has to lie to make things look better, then what are they trying to hide? Seems to me there are a bunch of vested interests trying to artificially prop up prices.
Be careful what you read and hear. It’s the wild Wild West out there.
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